Why China Remains a Major Sourcing Destination

cargo ship in sea

Introduction:

There have been countless articles and books about China’s reign as the factory of the world coming to an end. While it is true that wage increases are making some of China’s lower-end industries, such as textiles, less competitive vis-à-vis other low-cost countries such as Vietnam, Cambodia, and Bangladesh, China remains one of the top procurement sources for mid to high-tier products.

  • For instance, heavy equipment exports from China experienced a growth rate of about 30 percent in the last decade alone.
  • Even as some lower-end industries move out, there is more to a country’s competitive supply chain than labor costs.
  • China maintains a set of key factors that will continue to make it a competitive exporter even as the economic landscape shifts. These include:

1.  High-quality infrastructure: (especially export-related infrastructure)

china high speed trains

China’s advanced rail infrastructure and its high-speed trains

China rail infrastructure:

  • High-quality rail infrastructure that includes conventional and high-speed rail systems.
  • Trains can operate up to 217 mph, reducing crucial travel time between different ports.
  • It modernized rail infrastructure including electrification of lines and improved rolling stocks.

truck on china highway

Truck carrying cargo on China’s new highway

China road infrastructure:

  • China holds one of the largest highway systems in the world, the National Expressway Network, covering over 160,000 kilometers.
  • They have improved quality and construction standards for safer travel.
  • Allows for speeds up to 75 mph, efficient for moving to different sites.

2008 vs 2020 china rail infrastructure

The increase in the amount of railroad infrastructure in 2008 vs 2020

General Infrastructure:

  • China’s rail and road infrastructure is among the most developed globally, particularly along the coastal cities.
  • With a history of double-digit investment in infrastructure, China’s ports complement the rail/road infrastructure.
  • Shanghai has long surpassed Singapore as the world’s busiest port and it will be a while before key competing countries can match China’s current (and continuously developing) infrastructure.

ningbo and shanghai ports

Shanghai and Ningbo ports with hundreds of cargo

2.  Increasing qualified labor force:

China’s qualified individuals:

  • China produces hundreds of thousands of graduate engineers and scientists each year to be absorbed into the local industries.
  • Moreover, China now has the world’s largest student population studying overseas with a sizeable number returning upon completion of their studies.
  • Although there has been renewed attention to quality rather than quantity in the number of graduates, the increasing education level will boost China’s competitiveness vis-à-vis some of the other low-cost sourcing destinations.

china worker in factory

Workers operating within a factory using highly advanced equipment

3.  Growing research and development expenditure leading to a higher innovation capacity:

  • Despite the reputation for copying, China’s innovation has continued to pick up pace.
  • As internal and external competition increases, China also focuses on price reduction, adaptation of business models, and supply chain development.
  • This will lead to the elimination of less efficient firms, both domestically and those focused on the export market.

Expanding research and development fields:

  • A report by McKinsey & Company (Greater China) highlights innovation in areas such as renewable energy, consumer electronics, instant messaging, and mobile technology.
  • China also puts a big emphasis on biotechnology and healthcare, fighting against prominent diseases. Innovations in medical devices and vaccines help combat these issues.
  • China’s evergrowing infrastructure requires a lot of research and development, and with good care, the results show, based on the improvement of rails and road systems.

Worker inspecting piece of equipment

A worker carefully inspecting a piece of equipment

4.  Lower costs relative to industrialized countries:

China’s wage system:

  • Despite double-digit growth in both wages and currency appreciation during the past decade, China’s minimum wage still stands far below that of industrialized countries.
  • Rising wages are correlated with increasing productivity.
  • Therefore countries competing with China for lower costs will have to also compete with increased productivity and vice versa.

china construction worker

China’s construction workers relaxing

5.  Specialization, not only at the sector level but also at the product level:

  • China’s specialization in various products remains unparalleled globally.
  • There are entire towns dedicated to producing a single product.

Different areas of specialization:

  • For instance, Shenyang, a city in northeast Liaoning Province, has developed a reputation for its heavy industry, particularly in the manufacture of automobiles and light machinery.
  • The Pearl River Delta is known for the textiles/electronics industries, whereas Shenzhen has become the IT hub of China.
  • Moreover, the product range available in these agglomerations is diverse, catering to low- to high-end products, resulting in differentiation as a key competitive factor.

pearl river delta technology

Pearl River Delta becomes a technology hub

6.  Pro-export policies:

  • The Chinese authorities have indeed decided to alter the export-led growth model to one focused on domestic consumption.
  • However, the country’s “going out” policy combined with an increasingly saturated domestic market, especially in sectors related to fixed assets investment such as steel, cement, and heavy equipment, continues to have explicit support (via export rebates or subsidies) or tacit support (high barriers to entry, licensing requirements), especially at the local level.
  • This support will continue to boost Chinese exports’ competitiveness – at least in the short term.

korea and china free trade agreement

China and South Korea signing a free trade agreement

Conclusion:

Overall, China remains one of the prime sourcing agents due to many reasons listed above. Whether that be advanced technology and material quality to lower costs, China has its benefits and advantages over other sourcing partners. Continually, we will conclude the shift inland aspect of China.

  • A shift inland: As the coastal areas become expensive, investment in areas such as Chengdu and Chongqing, which are a distance from the coast, continues to see increasing direct investment from both local and foreign firms.
  • This is not to say that the inland does not pose its problems, but over time it may prove easier to shift inland than abroad.

Countries and companies that seek exports from China

How can CAMAL help you manage your China Sourcing?

✅ Do you spend too much time finding the right manufacturers in China?

✅Do you face difficulties in communicating your requirements to suppliers in China?

✅ Do your products often need customization just for you?

✅ Do you wish someone could help you with end-to-end procurement, so you can focus on growing your business?

If your answer is YES, Reduce Your China Sourcing Headaches, Contact Us Now for a FREE Consultation

✅CAMAL: Quality Factories = Quality Products = Happy Customers✅

Selecting a Chinese Construction Partner

Chinese construction firms, typically referred to by the construction model of engineering, procurement, construction (EPC), have gained a reputation for carrying out some of the largest construction projects both domestically and overseas. In fact, China now claims more than half of the top 10 tallest buildings in the world and according to the weekly magazine Engineering News Record, more than 60 percent of major contracting projects in Africa are now being carried out by Chinese firms. A quick look at China’s Ministry of Commerce (MOFCOM) information shows that there are over 3,000 firms permitted to carry out international project contracting. So how does one identify a suitable EPC partner?

1. Can the EPC carry out overseas projects? Not every Chinese construction firm is permitted to undertake overseas projects and the MOFCOM maintains a list of permitted firms. Moreover, given the large domestic market, some firms may have no interest in venturing overseas.

2. What is the source of financing for the overseas project? If one were to pick a decisive factor in deciding if a Chinese EPC company is a suitable partner, the African partner must be clear on the source/type of financing for the proposed project. This is also directly linked to the type of business cooperation model, such as a turnkey EPC project, Build-Operate-Transfer (BOT), Public Private Partnership (PPP) etc. • If a project has financing, then a large majority of firms would be able to carry out the project. However, if one requires financing, then one must address a new set of questions on how the EPC will recoup its financing:

(1) Does the project have sovereign guarantee?

(2) Can an international financial institution guarantee the project?

(3) Can a local financial institution guarantee the project?

• If the above is possible, then the pool of cooperation partners remains significantly large, but will reduce for each question answered “no.”

• If the project cannot offer any of the above guarantees, then a business case for the project must exist:

(1) Does the project have a feasibility study from a reputable institution?

EPCs will more readily consider projects that do not entirely depend on the market, such as power projects that can be backed by a power purchasing agreement.

(2) Does the project require the EPC to carry out the study? This will significantly reduce the type of interested EPC companies in the project.

3. What is the structure of the EPC? There are projects that are more favorable to state-owned companies as opposed to private companies. Moreover, even within state-owned companies, some projects are more suited to central government firms, i.e. those based on government-togovernment agreements or those that require financing from Chinese state-owned policy banks, such as the Export-Import Bank of China or China Development Bank.

4. What are the technical requirements of the project? For most projects, Chinese EPC firms are able to be the main project contractor while subcontracting specific sections. However, only select firms are allowed to carry out projects that require very specific expertise, such as construction of an airport runway or nuclear facilities, especially if they are state-owned, as there are specific licensing requirements.

5. Where is the project? There are EPC firms that are not allowed to venture into certain geographic regions due to Chinese government regulations, internal policies within the firm that restrict intra-group competition, or simply because the EPC has no interest in venturing into a given area. For large EPC companies, such as China Communications Construction, Sinohydro or China Railway Construction, policies to reduce intra-group competition are particularly relevant.

6. To bid or not to bid? For certain projects there must be international bidding and some EPCs are simply not willing to bid. Reasons may be diverse, such as lower profits due to increased competition, a low chance of acquiring the project, the large investment that may be required to carry out the bidding process with an uncertain outcome, etc.

As Chinese EPC firms continue to expand their reach within the continent, it is crucial that their African partners remain cognizant of how these firms are operating on the continent in order to identify and select suitable partners.

This article originally appeared in the Chinafrica Magazine, Selecting a Chinese Construction Partner

Shanghai Free Trade Zone: Tips for African Firms

This month’s column highlights some of the policies designed to attract foreign capital and enterprises to China (Shanghai) Pilot Free Trade Zone (SFTZ), the challenges these enterprises may face and the implications for African companies. We hope these tips will be useful in providing a basic understanding of China’s complex business environment and how to best navigate it.

Snapshot of some policies inside the SFTZ

The trial period for the SFTZ has been set at three years, during which regulations will be gradually eased to allow more openness within the zone. There are several liberal policies (vis-à-vis the rest of the Chinese mainland) that are bound to encourage foreign capital and enterprises to enter the zone. A few selected ones include:

• No minimum registered capital requirement for companies;

• A faster registration process and simplified requirements for not only domestic, but foreign enterprises as well (registration is supposed to take a maximum of two weeks);

• A more open service sector that cuts across industries ranging from entertainment to the health sector including various types of insurance;

• A program that will test free RMB convertibility, i.e. firms will be able to use a specialized account to access overseas RMB;

• Flexible interest rates within the zone;

• A more liberal tax system including the ability to make payments in installments;

• A more liberal policy toward the establishment of foreign-funded banks and joint-venture banks. Foreign banks will now be permitted to invest overseas and trade financial instruments with less restrictions;

• Less restrictions for incoming goods including more free time at the port;

• An upgraded international commodity trading and resource configuration platform;

• More level playing field between domestic and foreign firms in that no approvals will be required for activities not on the Negative List, i.e. permitted industries.

As the policies continue to be adjusted and implemented, authorities intend to use lessons learned during the initial trial period to expand some of the policies into other key cities in China.

SFTZ development: Some challenges

As the SFTZ takes off, there are still some areas that present challenges for foreign companies. These include:

1. The existence of a Negative List – the list reaffirms that the SFTZ is not a free-for-all and that some sectors such as mining, power services and education are still restricted for foreign investment. Whereas there are plans to continually reduce the number of sectors on the Negative List over the trial period, the pace and breadth of implementation still remains to be seen.

2. Policy gap between the SFTZ and the rest of China – although the SFTZ itself has liberal policies, these policies are confined to the zone. Companies that have a presence both inside the SFTZ and elsewhere on the Chinese mainland may find limits on what can be done across zone boundaries.

3. SFTZ policies are generally more favorable to domestic firms moving out than foreign enterprises coming in.

4. Given that the zone is still in its initial stages, there are still a number of policies that need to be clarified in the coming years. This includes the criteria for shortening the Negative List as well as some financial policies such as futures trading and various tax regulations.

Implications for African firms

The SFTZ is a large step forward for both domestic and foreign firms. African firms should be ready to explore what opportunities lie in the zone, especially for businesses not on the Negative List.

Those on the Negative List should pay close attention to evolving regulation in case their business areas become permitted. The SFTZ represents a more flexible source of partnerships with Chinese companies, which has the potential to overcome challenges related to currency controls, complicated regulations and bureaucracy that at times hampers the process of Sino-foreign cooperation overseas, especially when capital must originate from the Chinese mainland. Companies engaged in international trade will now be able to engage their Chinese counterparts with fewer restrictions and sidestep cumbersome procedures of the Shanghai Entry-Exit Inspection and Quarantine Bureau. This should ease overall trading between China and Africa. The fact that SFTZ policies are more favorable to outbound investment from domestic companies should encourage African companies to tap into this outflow of capital, especially in the resource sector and other similar areas that the Chinese Government has prioritized for overseas investment. By setting up within the SFTZ, African firms will be able to enjoy more liberal policies hitherto unavailable on the Chinese mainland.

This article originally appeared in the Chinafrica Magazine, Shanghai Free Trade Zone: Tips for Investors

China’s Mining Sector an Opportunity for Africa

Overview of China’s mining sector

Although Africa is home to some of the largest mining deposits, China retains the title of the world’s largest mining sector. It is a leading producer of minerals such gold, lead, zinc, coal, tin, iron and silver and the world’s foremost producer of rare earths, accounting for over 90 percent of the global production. Ironically, China is also the world’s top consumer of the same minerals and often has to rely on imports to deal with the internal deficit. There is no doubt that the future success of the Chinese economy is dependent on the ability to secure long-term access to mineral and metal resources.

Consolidating the mining sector

According to China’s Ministry of Land and Resources, there are over 100,000 mining companies in China with more than half of these classified as small-sized enterprises. So many small companies have resulted in inefficient mining in many areas and high-risk operations as smaller mines tend to be the epicenters of mining accidents, particularly in the coal sector. To address these issues, the Chinese Government has been consolidating the mining sector. As consolidation takes place, the smaller companies face these options:

• Increasing output to government-directed levels – Companies with enough capital and reserve levels can simply increase output and comply. However, considering high output requirements and restrictive capital expenditure costs, this option is not always feasible;

• Partnering with bigger players or other companies to reach required output – This is the favored approach of most companies. However, competition between companies, difference in their cultures, divergence in cooperation terms, etc. mean this route is not always feasible;

• Exiting the market – If the above two options are not viable, smaller companies must exit the market either by shutting down or going overseas. This is an opportunity for African companies, especially those seeking partnerships.

Opportunity for African companies

In some provinces such as Hebei, smaller (and often private) companies are being pushed out of the iron and steel sector. Some of these companies’ technology and processes are inherently not problematic; the key issues driving consolidation are low output value and a drive to reduce high energy consumption and high polluting industries. African companies’ opportunities can be summarized as follows:

1. Opportunity for technology transfer – The opportunity for technology and expertise transfer is real. Given the vast scale of China’s mining sector, what is considered small scale here may actually be large scale in parts of Africa. Smaller players that cannot meet the output are forced out of the industry. But where shall they go?

2. Opportunity for capital investments – As the small companies are pushed out of the domestic sector, they will either put their capital into other domestic sectors or go abroad in search of viable projects.

3. Opportunity for exports – As the smaller companies exit and the global mining slowdown continues, China’s mineral deficit will continue to drive commodity imports, especially of high grade minerals.

4. The “going out” drive – It is not only the smaller players that are seeking to move out of China. With a steel sector that has been producing over capacity for years and facing decreasing government subsidies, even larger players have been moving out of China. Sinosteel, one of China’s largest iron and steel companies, has signed a cooperation deal with the Kenyan Government to jointly develop a steel plant in the East African nation.

African companies need strategic partners

It would be naïve to think that all the companies that have been pushed out of China’s domestic sector are viable partners. In fact, there are many that are indeed problematic in terms of excessive energy consumption, environmental damage, inadequate technology and poor safety records. This is why African companies must be strategic in selecting their Chinese mining partners. They should understand the implications of the offered technology/processes, particularly in terms of the environment. One needs to only visit the polluted areas in Inner Mongolia to understand that sometimes the best lessons coming out of China for African companies may be what not to do.
This article originally appeared in the Chinafrica Magazine, China’s Mining Sector an Opportunity for Africa

10 Tips to Do Business in China

Delegates in an Africa-China conference

1. Understand China’s Geographic Diversity

Chinese people at a tourists’ attraction

Chinese people at a tourists’ attraction

  • China is massive and diverse
  • Interior provinces differ from coastal provinces
  • Southern provinces differ from northern and western provinces in:
    • Consumption levels
    • Habits
    • Business culture
  • Target specific markets rather than assuming a uniform “1 billion+” market

2. Recognize Different Types of Chinese Companies

African and Chinese entrepreneurs shaking hands

African and Chinese entrepreneurs shaking hands

  • Avoid generalizing “Chinese companies”
  • Distinguish companies based on structure
    • Central Government state-owned enterprises
    • Local state-owned enterprises
    • Private companies
    • Joint-stock companies
  • Each type has unique:
    • Operating methods
    • Decision-making processes
    • Strengths and weaknesses

3. Learn from Other Foreign Firms

  • Don’t reinvent the wheel
  • Study both success stories and failures
  • Use this knowledge to complement due diligence

Starbucks Reserve in China

Starbucks Reserve in China

4. Be Proactive in Approaching Chinese Markets

  • Don’t wait for Chinese companies to come to you
  • Take the initiative to venture into China
  • Remember that not all Chinese companies abroad represent the strongest firms

Two businessmen talking

Two businessmen talking

5. Educate Chinese Partners About Your Market

  • Most Chinese firms may have limited knowledge of your own country
  • Explain your project’s value proposition
  • Provide substantial information to validate your assertions

African and Chinese entrepreneurs partners chatting

African and Chinese entrepreneurs chatting

6. Understand China’s Investment Regulations

  • For inbound investment, consult the Foreign Investment Industrial Guidance Catalog
  • For outbound investment, be aware of regulations affecting Chinese firms abroad

One Belt One Road business expo

One Belt One Road business expo

7. Engage Local Legal Expertise

  • Hire a local lawyer for larger transactions, especially inbound investments
  • Ensure they understand China’s evolving regulations in your specific industry

Chinese and African legal professionals

Chinese and African legal professionals

8. Find a Reliable Local Partner

  • Success often depends on having a good local partner
  • Conduct thorough due diligence
  • Understand potential partners’ strengths and weaknesses
  • Establish clear conflict-resolution mechanisms
  • Have an exit plan in case of failure

Chinese and African leaders talking business

Chinese and African leaders talking business

9. Learn Chinese Business Culture Basics

  • Understand formalities and negotiation tactics
  • Recognize cultural differences that may impact business

An ongoing Chinese business meeting

An ongoing Chinese business meeting

10. Exercise Patience

  • China’s business environment is unique
  • Success depends on understanding:
    • Channels to market
    • Local regulations
    • Market segmentation
    • Supply lines
  • Take time to comprehend these factors thoroughly

An African and a Chinese person laughing while chatting

An African and a Chinese person laughing while chatting

How can CAMAL help you manage your China Sourcing?

✅ Do you spend too much time finding the right manufacturers in China?

✅Do you face difficulties in communicating your requirements to suppliers in China?

✅ Do your products often need customization just for you?

✅ Do you wish someone could help you with end-to-end procurement, so you can focus on growing your business? 

If your answer is YES, Reduce Your China Sourcing Headaches, Contact Us Now for a FREE Consultation

✅CAMAL: Quality Factories = Quality Products = Happy Customers✅

Benefits of using CAMAL as your sourcing agent for quality check